How financial advisers and defined contribution plan providers educate clients and participants about Social Security

Introduction

Many experts believe that many older workers have not accumulated enough money to enable them to maintain financial security throughout their retirements, especially if they live beyond their life expectancies. One way to enhance retirement financial security would be to better educate people about when to claim Social Security benefits so they can make an informed choice. Sass (2012) has estimated that a worker who delays claiming from age 62 to age 70 will get a 76 percent inflation-adjusted increase in monthly Social Security benefits. Even waiting from age 66 to age 70 will increase, he estimates, inflation-adjusted monthly benefits by 32 percent. Further, the benefits are also adjusted upward by inflation every year. These benefit increases are calculated to be actuarially fair: thus, a person in average health can expect no decrease in the total benefits received over their lifetimes. Those in better-than-average health can expect to get more over their lifetimes than is lost by delaying and forsaking benefits. Also, those in poor health can ‘select' against the Social Security Administration and claim benefits early. Claiming later leads to substantially increased benefits, which would give workers extra protection should they live to a very old age, when they would have the most financial pressure. For the majority of people who have not accumulated enough, an informed decision about when to claim benefits offers an opportunity to substantially enhance financial security in later years.

Currently, many Americans are not well informed about when to claim and, for some, the timing of claiming is likely to be sub-optimal. Two channels are often used to educate workers about Social Security and the optimal time to claim: financial advisers, and defined contribution (DC) plan providers. This chapter examines current practices in terms of how financial advisers and plan participants educate those they serve. We identify some shortcomings and offer suggestions to enhance education and advice.

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